Stock Market Indices: A Comprehensive Guide for Beginners

Question 1

How can geopolitical events influence the behavior of stock market indices?

Accepted Answer

Geopolitical events can cause market volatility and fluctuations in stock prices.

Answer

Geopolitical events do not have any impact on stock market indices.

Answer

Geopolitical events can lead to higher investor confidence and increased stock prices.

Question 2

Which of the following is NOT a primary purpose of stock market indices?

Accepted Answer

Calculating the value of individual company shares

Answer

Measuring overall stock market performance

Answer

Providing a benchmark for investment portfolios

Answer

Analyzing economic trends

Question 3

Which of the following is an example of a global stock market index?

Accepted Answer

MSCI World Index

Answer

FTSE 100

Answer

Nikkei 225

Answer

S&P 500

Question 4

Which indicator is commonly used to measure the movement of a stock market index?

Accepted Answer

Percentage change

Answer

Absolute change

Answer

Beta coefficient

Answer

Correlation coefficient

Question 5

How do ethical considerations influence the construction of stock market indices?

Accepted Answer

Index providers and regulators ensure fairness and transparency in index construction, incorporating ethical principles.

Answer

Ethical factors are ignored in index design.

Answer

Indices solely reflect market performance, excluding subjective influences.

Answer

Index composition is determined solely by market capitalization and liquidity, disregarding ethical concerns.

Question 6

What is the primary purpose of a stock market index?

Accepted Answer

To provide investors with a benchmark for comparing the performance of their portfolios

Answer

To measure the overall performance of a specific sector of the economy

Answer

To track the daily changes in share prices of a selected group of companies

Answer

To predict future market trends with certainty

Question 7

How is the FTSE 100 index calculated?

Accepted Answer

By weighting the market capitalisation of the 100 largest companies listed on the London Stock Exchange

Answer

By averaging the share prices of the 100 largest companies listed on the London Stock Exchange

Answer

By tracking the price changes of the 100 most actively traded stocks on the London Stock Exchange

Answer

By combining the returns of all companies listed on the London Stock Exchange

Question 8

Which of the following is NOT a characteristic of a good stock market index?

Accepted Answer

Predictability

Answer

Transparency

Answer

Reliability

Answer

Completeness

Question 9

Which of the following is NOT a type of stock market index?

Accepted Answer

Sentiment-weighted index

Answer

Price-weighted index

Answer

Value-weighted index

Answer

Equal-weighted index

Question 10

How is the value of a price-weighted index calculated?

Accepted Answer

By multiplying the price of each stock by its weight in the index

Answer

By dividing the total market capitalization of the stocks in the index by the number of stocks

Answer

By summing the percentage changes in the prices of the stocks in the index

Answer

By taking an average of the earnings per share of the stocks in the index

Question 11

How do stock market indices typically react to economic growth and decline?

Accepted Answer

Indices usually rise during economic growth and fall during economic decline.

Answer

Indices are not influenced by economic conditions.

Answer

Indices usually fall during economic growth and rise during economic decline.

Question 12

Which index is calculated by taking the average price of a **fixed basket** of stocks?

Accepted Answer

Dow Jones Industrial Average

Answer

Standard & Poor's 500

Answer

Nasdaq Composite

Answer

Russell 2000

Question 13

Which index is heavily influenced by technology and internet-related stocks?

Accepted Answer

Nasdaq Composite

Answer

Dow Jones Industrial Average

Answer

Standard & Poor's 500

Answer

Russell 2000

Question 14

What is the difference between a capitalization-weighted index and a price-weighted index?

Accepted Answer

Capitalization-weighted indices consider the market value of companies, while price-weighted indices do not.

Answer

Price-weighted indices consider the market value of companies, while capitalization-weighted indices do not.

Answer

There is no difference between the two types of indices.

Answer

Capitalization-weighted indices are more volatile than price-weighted indices.

Question 15

What is the FTSE 100 Index?

Accepted Answer

A capitalization-weighted index of the 100 largest companies on the London Stock Exchange

Answer

A price-weighted index of the 100 largest companies listed on the London Stock Exchange

Answer

A sector-specific index of the 100 largest companies listed on the London Stock Exchange

Answer

An industry-specific index of the 100 largest companies listed on the London Stock Exchange

Question 16

Which of the following is NOT a benefit of using stock market indices?

Accepted Answer

Guarantees investment returns.

Answer

Provides investors with a quick overview of market performance.

Answer

Helps investors identify investment opportunities.

Answer

Helps investors manage risk.

Question 17

How do stock market indices contribute to diversifying portfolios and managing risk?

Accepted Answer

Indices diversify portfolios by including stocks from various sectors and industries, reducing overall risk.

Answer

Indices help identify undervalued stocks by comparing their performance to the broader market.

Answer

Indices can be used to hedge against inflation by investing in companies that benefit from rising prices.

Question 18

Which of the following is a key characteristic of a stock market index?

Accepted Answer

It is calculated based on the prices of a group of stocks.

Answer

It measures the performance of a single company.

Answer

It represents the entire stock market.

Answer

It is not used by investors in decision-making.

Question 19

What is the purpose of a stock market index?

Accepted Answer

To provide a snapshot of the overall performance of the stock market

Answer

To allow investors to compare the performance of different stocks

Answer

To predict future stock market movements

Answer

To regulate the trading of stocks

Question 20

How is the FTSE 100 index calculated?

Accepted Answer

Weighted average of the market capitalizations of the 100 largest companies

Answer

Average of the share prices of the 100 largest companies on the London Stock Exchange

Answer

Median of the share prices of the 100 largest companies

Answer

Total value of all shares traded on the London Stock Exchange

Question 21

The Dow Jones Industrial Average (DJIA) is based on which of the following?

Accepted Answer

30 largest industrial companies listed on the New York Stock Exchange

Answer

100 largest technology companies listed on the NASDAQ

Answer

500 of the largest publicly traded companies in the United States

Answer

All publicly traded companies on the New York Stock Exchange

Question 22

Which of the following is not a benefit of using stock market indices?

Accepted Answer

Offering guaranteed high returns

Answer

Simplifying investment decisions

Answer

Providing diversification

Answer

Enabling performance evaluation

Question 23

Market-capitalization-weighted and price-weighted indices differ in their weighting methods. How?

Accepted Answer

Market-capitalization-weighted indices give greater significance to larger companies, while price-weighted indices assign equal weight to all companies.

Answer

Price-weighted indices give greater prominence to larger companies, while market-capitalization-weighted indices assign equal weight to all companies.

Answer

Both types of indices assign equal weight to all companies.

Answer

There is no distinction in their weighting approaches.

Question 24

How can index manipulation potentially affect investors' decision-making and market integrity?

Accepted Answer

Index manipulation can erode investor trust in the market.

Answer

Index manipulation improves the accuracy of market information for investors.

Answer

Ethical guidelines alone can prevent index manipulation.

Question 25

How does a rise in inflation generally affect stock market indices?

Accepted Answer

Negatively, as inflation reduces corporate profits

Answer

Positively, as inflation indicates economic growth

Answer

No impact, as stock market indices are unaffected by inflation

Answer

Positively, as inflation motivates investors to seek higher returns in stocks

Question 26

What is a stock market index, and why is it important in the financial world?

Accepted Answer

A stock market index measures the performance of a group of stocks, providing insights into market trends and investor sentiment.

Answer

A stock market index represents the total value of all publicly traded stocks.

Answer

A stock market index indicates the number of shares traded in a given period.

Question 27

Which stock market index is the most widely used in the UK?

Accepted Answer

FTSE 100

Answer

Dow Jones Industrial Average

Answer

NASDAQ Composite

Answer

S&P 500

Question 28

What is the primary purpose of a stock market index?

Accepted Answer

Measuring the overall performance of a specific market or sector

Answer

Serving as a benchmark for investment decisions

Answer

Predicting future market trends

Answer

Facilitating the trading of individual stocks

Question 29

Which type of index includes the largest and most actively traded companies in a market?

Accepted Answer

Blue-chip index

Answer

Growth index

Answer

Sector index

Answer

International index

Question 30

What is the significance of index rebalancing?

Accepted Answer

To ensure that the index remains representative of the market

Answer

To increase index volatility

Answer

To decrease index diversification

Answer

To provide opportunities for trading

Question 31

How do stock market indices reflect economic conditions?

Accepted Answer

Stock market indices often mirror economic performance.

Answer

Stock market indices are the sole indicators of economic growth.

Answer

Economic factors do not affect stock market indices.

Answer

There is no connection between stock market indices and economic conditions.

Question 32

What is a key distinction between the FTSE 250 and FTSE 350 indices?

Accepted Answer

The FTSE 250 comprises mid-sized companies, whereas the FTSE 350 comprises large-sized companies.

Answer

The FTSE 250 is price-weighted, while the FTSE 350 is market-capitalization-weighted.

Answer

The FTSE 250 is inherently more volatile than the FTSE 350.

Answer

There are no significant differences between the two indices.

Question 33

How can the limitations of stock market indices, such as their narrow focus or potential bias, affect investment decisions?

Accepted Answer

Indices may be biased towards certain sectors or company sizes, potentially influencing investment choices.

Answer

Indices provide a comprehensive view of the market, ensuring informed investment decisions.

Answer

Indices are unaffected by external factors, guaranteeing reliable investment decisions.

Question 34

How do sector-specific stock market indices provide valuable insights into the performance and trends of specific industries?

Accepted Answer

Sector-specific indices reflect the average performance of companies within a specific industry or sector.

Answer

Sector-specific indices measure the overall health of the entire stock market.

Answer

Sector-specific indices are not useful for making investment decisions.

Answer

Sector-specific indices are calculated using a random selection of companies.

Question 35

The FTSE 100 Index can be classified as a:

Accepted Answer

Capitalization-weighted index

Answer

Price-weighted index

Answer

Equal-weighted index

Answer

Sector-specific index

Question 36

How is the Dow Jones Industrial Average (DJIA) calculated?

Accepted Answer

Sum of the share prices of 30 prominent companies

Answer

Average share price of the 500 largest companies

Answer

Weighted average share price of the 100 largest companies

Answer

Sum of the market capitalizations of the FTSE 100 companies

Question 37

Explain the main distinction between a price-weighted index and a capitalization-weighted index.

Accepted Answer

Price-weighted indices reflect the share price of each company equally, while capitalization-weighted indices reflect their market value.

Answer

Capitalization-weighted indices reflect the share price of each company equally, while price-weighted indices reflect their market value.

Answer

Price-weighted indices are inherently more volatile than capitalization-weighted indices.

Answer

Capitalization-weighted indices are inherently more volatile than price-weighted indices.

Question 38

Which stock market index weighting method gives the same significance to all the stocks in the index, irrespective of their size or market value?

Accepted Answer

Equal-weighted index

Answer

Price-weighted index

Answer

Market capitalization-weighted index

Question 39

Which of the following is NOT a type of stock market index?

Accepted Answer

Government bond index

Answer

Price Index

Answer

Market-Capitalization Index

Answer

Sector Index

Question 40

The FTSE 100 index is an example of which type of stock market index?

Accepted Answer

Market-Capitalization Index

Answer

Price Index

Answer

Government bond index

Answer

Sector Index

Question 41

How is the Nasdaq Composite index calculated?

Accepted Answer

Based on the market capitalization of all companies listed on the Nasdaq stock exchange

Answer

Based on the total value of all shares traded on the Nasdaq stock exchange

Answer

Based on the average price of all companies listed on the Nasdaq stock exchange

Question 42

Which of the following is a benefit of using stock market indices?

Accepted Answer

Can provide a benchmark for portfolio performance

Answer

Can eliminate market risk

Answer

Guarantee investment returns

Answer

Are always accurate

Question 43

How can investors use stock market indices to make informed investment decisions?

Accepted Answer

By comparing their performance to the performance of other indices and identifying trends

Answer

By investing in all companies included in the index

Answer

By blindly following their recommendations

Question 44

What are the ethical responsibilities associated with the use of stock market indices?

Accepted Answer

Ensure indices are calculated fairly and accurately, and avoid conflicts of interest

Answer

Invest in companies that have poor environmental practices

Answer

Manipulate indices for personal gain

Question 45

What is a benefit of diversifying a portfolio based on stock market indices?

Accepted Answer

Can reduce overall investment risk by spreading investments across different market sectors

Answer

Guarantee investment returns

Answer

Eliminate market risk

Question 46

Which type of stock market index measures the performance of a specific industry or sector?

Accepted Answer

Sector Index

Answer

Country Index

Answer

Broad Market Index

Answer

Equal-Weighted Index

Question 47

Which of the following is a potential limitation of market capitalization-weighted indices?

Accepted Answer

They can be heavily influenced by the performance of a few large companies

Answer

They do not include small-cap companies

Answer

They are not suitable for long-term investments

Answer

They are complex and difficult to calculate

Question 48

How does an equal-weighted index differ from a value-weighted index?

Accepted Answer

An equal-weighted index assigns equal weight to each stock, while a value-weighted index assigns weight based on the company's market capitalization

Answer

An equal-weighted index represents large companies, while a value-weighted index represents small companies

Answer

An equal-weighted index is calculated using stock prices, while a value-weighted index uses dividends

Question 49

What is a key advantage of utilizing stock market indices?

Accepted Answer

They provide a benchmark for evaluating investment performance

Answer

They guarantee high returns on investment

Answer

They are a reliable source of investment advice

Answer

They eliminate the need for individual stock selection

Question 50

Which of the following formulas calculates the value of a price-weighted index?

Accepted Answer

Sum of (Stock Price x Number of Shares) / Divisor

Answer

Sum of (Market Capitalization) / Number of Companies

Answer

Sum of (Book Value) / Number of Shares

Answer

Average of (Dividend Yield) / Number of Companies

Question 51

Which stock market index has a global scope?

Accepted Answer

MSCI World Index

Answer

Hang Seng Index

Answer

S&P 500 Index

Answer

FTSE 100 Index

Question 52

What is the primary significance of tracking stock market indices for investors?

Accepted Answer

To monitor market trends and make informed investment decisions

Answer

To ensure a positive return on investment

Answer

To eliminate the need for financial research

Answer

To predict future stock prices accurately